Reshaping Fiscal Federalism: Adaptive Responses in the Era of Polycrisis – Empirical Evidence from European Countries

Abstract

Fiscal federalism has evolved significantly in response to complex crises affecting the balance between decentralization and centralization in governance. The COVID-19 pandemic, geopolitical conflicts, climate change, financial instability, and demographic shifts have prompted adaptive governance, including temporary recentralization, increased fiscal transfers, and flexible policy responses. This article examines adjustments to fiscal decentralization models in selected European countries, exploring the financial frameworks of subnational governments (SNGs). The study analyses the relationship between the size of the local government sector and economic indicators such as GDP per capita, unemployment, and GDP growth from 1995 to 2023, covering economic disruptions including the 1998 and 2008–2009 global financial crisis and the 2020–2022 COVID-19 pandemic across 25 European countries. A subsequent cluster analysis categorizes countries based on their fiscal federalism models, using SNG fiscal indicators to assess their adaptability to crises. Findings suggest that countries with SNGs that actively invest and moderately redistribute achieve better long-term economic performance.